Three Themes to Watch Over the Next Two Weeks

Here's some of the themes that Macro Man will be watching over the next two weeks:

1) Another August of pain for Mrs. Watanabe?

Even as the flightless bird has fallen from the sky, Japanese retail investors have built up record longs in NZD. The last couple of sessions suggest that Mrs. Watanabe might be pulling the "eject" handle. The last time that happened was, er, this time last year, as highlighted above. NZD/JPY is at absolutely critical long-term levels, as the chart below illustrates. Macro Man wouldn't be surprised to see a repeat of August 2007.

2) The China trade takes a beating?

The Great Firewall of China is already rousing the ire of Western journalists. By all accounts the air pollution around Beijing remains a real issue, particularly for the endurance events - Macro Man's glad he's not an Olympic marathoner. At the same time, certain datapoints suggest an economy that's juddering to a halt: China's PMI sank below 50 for the first time ever (OK, there is only a 3 year history) overnight.

The Aussie dollar has been one of the popular China proxy trades, and it's started to come under some decent pressure in the last week. While rate-cut rumours seem premature, Canada provides a precedent for a commodity-rich country that's cut rates early when its major trading partner slows down.

3) The equity pain trade

For the third quarter in a row, earnings season has seen equities put in a bounce to temporarily reverse a prior steep decline. While Macro Man's analysis suggests that the fundamental backdrop for stocks is still lousy, there is nothing to say that those fundamentals will drive price in the short term.

Indeed, he's looking for a bit of a repeat of last quarter, which is best represented by the Eurostoxx chart- a sharp pop up (which we've already seen), followed by a few weeks of slow, vol-crushing, soul-destroying grind higher.

While this may seem incompatible with themes 1 and 2, bear in mind that despite the moves described above, last year the SPX actually closed higher on the last day of Macro Man's holiday than it did when he left the office.

Given the backdrop and historical precedent, Macro Man will be watching the market.

Comments

[Coelacanth:]

Excellent commentary as usual Macro Man. Appreciate the heads-up on NZD/JPY.

It's striking to still see "the wingless bird" at these levels on NZD/JPY after Bollard has been pretty insistent lately that further rate cuts are in the offing. In the wake of bad German retail numbers, China's manufacutring growth contracting and a general sense the global economy is truly slowing, it's not too surprising to see carry-traders paring back bets.

I'm hoping to be the bane of folks like Mrs. Watanabe in the month of August. Recent retail numbers out of Japan suggest she hasn't been out shopping as much as lately. Maybe the drooping Yen crosses are already having an impact.

2008 Aug 01 09:43 AM

[OldLimey:]

Poor old Bollard. When HE says he'll slam the breaks on if the kiwi sinks too far too fast, nobody believes him. When Bernanke/Paulson try to jawbone the US peso higher the market obliges. Come on guys, who's earned the most credibility??!

2008 Aug 01 02:44 PM

[dieuwer:]

NZD/JPY already fell out of bed. You're late by 1 year. It's now forming a huge triangle. Breakout soon, but which way? I bet to the upside 'cause BOJ will be forced by FED to print Yen.

2008 Aug 01 03:51 PM